A Profitable Q1 Leaves Gilead CEO Money to Go Shopping for Possible M&As
May 1, 2015
By Riley McDermid, BioSpace.com Breaking News Sr. Editor
A brilliant performance during the first quarter of 2015 have buoyed biotech darling Gilead Sciences, Inc. throughout Friday trading, with analysts impressed by the company’s performance once again guessing the company could go shopping for deals within the next few quarters.
Gilead’s revenues grew 52 percent year over year to $7.6 billion, with diluted earnings per share of $2.76 handily beating Wall Street’s estimate of $2.21. Its profits almost doubled to $4.3 billion and it said it now expects 2015 product sales to weigh in at $29 billion, a massive jump from the previously estimated $2 billion.
All that money means Gilead should be making some deals fairly quickly, said CEO John Martin. “We are open to suggestions,” he said during Thursday’s earnings call.
The company’s crown jewels, hepatitis C drugs Harvoni and Sovaldi, drove a lot of that growth, with Geoffrey Porges, a biotech analyst at Sanford Bernstein, noting “HCV revenue of $4.6B was well ahead of consensus ($3.7B), driving healthy EPS upside ($2.94 vs consensus of $2.27) and an increase in guidance.”
Closely watched Evercore ISI biopharma analyst Mark Schoenebaum had only one word to illustrate what he thought about Gilead’s quarter: “Wowza.” Joshua Schimmer, an analyst at Piper Jaffray, simply said Gilead “crushed” the quarter.
“Total HCV product sales were up 19 percent sequentially despite competition from ABBV. The large increase was driven by volume, which was partially offset by a higher level of rebates,” wrote Schimmer in a note to investors.
“During Q1, Harvoni sales reached a record level of $3.6 billion whereas Sovaldi sales fell to $972 million as the majority of new GT1 pts chose Harvoni. Sales in EU reached an impressive $960 million this quarter, significantly higher than our initial estimate of $625 million. Our thesis that considerable upside lay in the ex-U.S. HCV franchise seems to be playing out.”
Martin’s openness to deals are music to some analysts’ ears. Market watchers have been pushing Gilead to buy scrappy competitor Vertex Pharmaceuticals for its booming cystic fibrosis drug franchise, with yet another closely watched columnist weighing in Tuesday that the deal makes plenty of sense from a value perspective.
A prominent analyst said last week that Gilead should make the buy for $45 billion. Porges said in a note to investors last Tuesday that a Gilead/Vertex deal would create significant long-term value for Gilead.
Today, Alexander Poulos, a columnist at Seeking Alpha, said he thinks the deal is a solid idea and worth chewing over.
“The VRTX/GILD combo makes quite a bit of sense from a discounted cash flow perspective…the melding of VRTX allows GILD to overcome the drop in revenue expected from the HCV franchise as patients are cured,” wrote Poulos. “The market is assigning GILD the lowest multiple in the sector due to the fear the revenue from the HCV franchise is not sustainable. The acquisition of VRTX would eliminate this fear thus paving the way for GILD multiple to expand.”
“Naturally, a new novel therapy for an unmet need such as a viable treatment for Hepatitis B (HBV) or Non-Alcoholic Steatohepatitis (NASH) would significantly add to GILD revenue generating ability,” he said. “My current price target for GILD is $117 as detailed in a previous article. Assuming VRTX newest combo is approved, it is quite reasonable to conclude the proposal makes sense.”
In Porges’s original note, titled “It's Time! Why Gilead Should Pull the Trigger on a $45bn Bid for Vertex…and Why Both Stocks Should Go Up,” argues that Gilead’s marriage to Vertex would solve lingering doubts about the company’s long-term revenue prospects. Many investors remain mystified as to what Gilead’s management has in store and Porges would like them to consider a major bolt-on buy like Vertex.
“Many investors remain heavily exposed to mid and large cap biotech stocks, in part, for the potential for significant additional M&A,” he wrote. “In today's note we tackle the elephant in the room for the sector, which is what Gilead's management might buy.”
Porges argues that Gilead, although successful in the near-term with its blockbuster pipeline, needs to be putting in place long-term plans to keep its franchise alive and well. Gilead has struggled to keep up with a booming biotech sector in the capital markets, primarily because Wall Street remains concerned that competition for its keystone HIV and hepatitis C drug franchises could eventually be its demise.
“[Gilead] needs the promise or high probability of an incremental $5-7 billion of revenue to reassure investors about their future outlook, and ideally any investment would add optionality for even higher revenue should upside scenarios play out," wrote Porges.
A merger with Vertex "makes the most sense, because its future is wholly dependent on CF [cystic fibrosis], where Gilead already has a product (Cayston) and commercial infrastructure."
Porges said that $45 billion would be the ideal sweet spot for any buy of Vertex, which could use its recent share gain to lock in a solid deal price.
“With a 50 percent premium over Vertex's recent stock price, a $45 billion cash/debt deal would be 7-8 percent dilutive to GILD in 2015, but would be accretive after 2017, assuming 27 percent cost savings. Investors could expect Gilead's stock to re-rate to $130-140 near term,” he said.
“Gilead has tremendous cash flow and debt capacity, and needs what we think will be $5-7 billion in incremental revenue by 2020,” wrote Porges. “There is a paucity of such assets available, and Vertex has by far the best profile and has significant complementarity to Gilead.”
But whatever Gilead does do, it needs to do it fast: Porges’s note estimates that Gilead will hemorrhage 30-40 percent of its revenue between 2017 and 2021.
"Given Merck & Co. 's timeline for entering the HCV market (we think early to mid-2016), and the disruption they may cause from aggressive contracting, we think the time for Gilead to move on such transactions is this year," Porges writes. "Our conversations with investors suggest that many of them feel the same way, and wonder why Gilead is taking so long to make such moves given their strong balance sheet, prodigious cash flow, unmistakable need (and mediocre multiple)."
